Honest Tea CEO: Small isn’t beautiful

February 16, 2011

Seth Goldman, the president and Tea-e-0 of Honest Tea, made it official today:. The Coca-Cola Co. will exercise its option to buy all of Honest Tea, the Bethesda, Md., maker of organic, healthy beverages.

Coke bought 40% of the firm for a reported $43 million in 2008, a controversial move at the time for the upstart company that positioned itself as a challenger to the conventional way of doing business in the beverage industry.

Seth broke the news in a letter to his shareholders last night, in a blog post this morning and in an interview today with me at the State of Green Business Forum 2011 in Washington, arguing that his mission to “democratize organics” will be supported by Coke..

In an unusual twist to the deal–one that amounts to a vote of confidence in Seth’s leadership–Coca-Cola will allow him to repurchase most of his own equity stake in the company. His name will remain on the bottle, along with that of his co-founder, Yale prof Barry Nalebuff, and the company will continue to operate out of its offices in downtown Bethesda, a short bike ride away from Seth’s home. [Disclosure: I’ve known Seth for years and we attend synagogue together.]

“This is absolutely still my baby,” he said.

Honest Tea didn’t say how much Coke will pay for the remaining 60%, which was tied to the company’s sales. Those Sales have just about tripled in the last three years–they’re still shy of $100 million–in part because Honest Tea has been able to ride on Coca-Cola’s powerful national distribution network. The brand can now be found not just in natural food outlets like Whole Foods but in supermarkets and drugstores like CVS and Rite Aid. Honest Tea is now sold in about 75,000 outlets, up from 15,000 before the Coke deal, and the company grown from 38 to 125 employees. Green jobs!

Of course, we’ve seen this story before, as one “green” or natural foods company after another is swallowed up by global giants. Sometimes it ends well–Gary Hirshberg, an Honest Tea board member, has been thrilled since his Stonyfield Farm became part of the much-bigger Group Danone. But the acquisitions of White Wave (Silk Soymilk) by Dean Foods or Ben & Jerry’s by Unilever did not bring happiness to the founders. Seth quoted one entrepreneur who told him: “For the first few weeks, they want to know your opinion, for the next few weeks they want to know your phone number, and after that, they don’t want to know you.”

So far, Seth told me, his experience with Coca-Cola has been excellent, if not always friction-free. Coke supported Honest Tea as it expanded its Fair Trade offerings across its full line of teas and juice drinks. And, of course, as the company’s sales grow, so do its purchases of tea from organic farms, most in the global south.

Packaging is “by far our single biggest footprint,” Seth said, and his work with Coke helped Honest Tea move to lightweight plastic as opposed to glass bottles. The company is developing a better bottle, using plant-based materials, which it will bring out later this year.

Tension did arise when Honest Tea brought out an Honest Kids product which proclaimed, with an exclamation point, that it contained “No high-fructose corn syrup!” Coke’s Minute Maid division, which distributes Honest Kids, vetted the language on the packaging and suggested changing it to “sweetened with organic cane sugar.”

“Is that a regulatory request or is that just a preference?” he asked.

“It’s a preference,” he was told. “But it’s a preference from a high level.”

Honest Tea’s brand promise is to be as natural as possible, he explained. The company likes to say: “Nature got it right. We put it in a bottle.”

“High fructose corn syrup is quite a few steps from nature,” he said. The original wording remained.

The other worry about the Coke sale is the potential for consumer backlash. Some people complained back in 2008 that Honest Tea was selling out–Inc. ran a story headlined Did Seth go to the dark side?.

Seth takes the concerns seriously. “We’re selling a lot more tea than we were, but I don’t want to lose a single consumer,” he says.

He tried to respond to phone calls and emails about the transaction.To the critics, he poses questions like: “What’s your strategy for changing corporate America? What’s your plan to get organic and sustainable products to consumers who don’t have access to them?”

“It’s easy to fall into the ‘big is bad, small is good’ trap,” he says.

I agree: To magnify their impact, the better companies have to go beyond small and local to get big and global.

Seth is confident that this story will have a happy ending–not just for Honest Tea and its shareholders, but for its customers and for the planet.

“If we’re serious about making change in the American diet, and about making change in the way agriculture happens in the developing world, then we have to take this to scale,” he said.

Stuart, in response I would say that
1) Can’t say for sure but there does seem to be a correlation between the spread of HFCS and the rise of obesity. This doesn’t prove anything but I would opt for the natural choice.
2) Yes. Fewer pesticides and herbicides are good for the planet and for workers.
3) Good question, but if you are worried about landscape imprint, eat less meat. Don’t fret over the tiny market for plant-based bottles (yet).
best, Marc

Wondering why there isn’t a greater focus on recycled content for all of these plastic bottles? (Reused is better than new.) It might help people take recycling their beverage bottles more seriously, esp those who still drink bottled water.

On another note, Marc, I’d be interested in hearing how it’s going operationally with some of the other companies that have been bought by Fortune 500’s or who’s leadership is now from big biz? I agree with Seth – it all has to go mainstream to scale. But I’m wondering how well other co’s have done at maintaining their original methodology and principles once under the big umbrella?

I’ll let Marc take the second question, but I wanted to help address your first one.

While we can’t speak for the packaging industry as a whole, Honest Tea has a unique position as the bottles that we use must be able to withstand high temperatures during the brewing process. If you’ve ever noticed, plastic water bottles are able to be much thinner, since they do not have the same brew techniques. Expanding our partnership with Coca-Cola has definitely enabled us to explore more technology and ways to make hot-fill plastic bottles more sustainable, which includes the use of recycled content, which we are hoping to test this year.

I had not heard about this company until last night (02/27) when I saw the story of Seth Goldman and Barry Nalebuff on CNBC and how they started Honest Tea. Now you have written about them as well (just picked up my email from 02/16). The bottom line is that there will always be someone to say how a successful Entrepreneur could have done it better or should have included something else, but what have any of these naysayers accomplished from their armchair that’s so note worthy?

Marc, if there is anything that should be passed on after seeing their story on TV and reading this article, in a word it’s: Mazal Tov!!!! Seth and Barry, job well done! Thank God … only in American does the American Dream come true.

It is easy to be skepticle of large companies taking over and eroding the underlying principles that founded the brand – the giant slays Goliath. Personally, I see this the other way around. The underlying principles from companies like Honest Tea have the possibility of affecting the principles of the larger corporation, however imperfectly and so inch by inch, the larger corporate culture learns and changes.

Hi Marc,
I applaud Honest Tea and its CSR efforts. I have read Seth’s interview from 2005 that talks of finally hitting a profit after years of operations. The delay being caused by the company’s efforts at giving back to their community of growers/suppliers in the form of royalties.

My question now is, how can they hope to give back at the same level while being owned by a public company whose focus is on short-term and bottom line numbers?

I’ve been a loyal consumer to Moroccan Mint Green tea since 2003. I bought it then by the case every week and I will continue to do so because I believe in this product. Especially because since it was sold the bottling is consistent.
Keep going –
Ezra